Professional Documents
Culture Documents
Savings Customers
Active User Rate for Service
Active Customers using Service
Year 0
500,000
N/A
N/A
Year 1
550,000
5%
27,500
Year 2
605,000
10%
60,500
Year 3
666,500
20%
133,100
At the business planning stage, it is also important to estimate the market sales potential, which is simply the
product of prospective buyers, quantity sold, and price.
Market Sales Potential (MSP) = Prospective Buyers (B) * Quantity Sold (Q) * Price (P)
Continuing with the same example, assume the bank charges a very small fixed fee of $0.10 for a bill payment
through the mobile phone. If it estimates that the average user makes 2 bill payments per month, the bank can
estimate the total sales for the bill payment service over a three-year business cycle.
Year 0
0
N/A
Year 1
27,500
24
$0.10
Year 2
60,500
24
$0.10
Year 3
133,100
24
$0.10
N/A
$66,000
$145,200
$319,400
$530,640
It should be noted that depending on the service being offered, the profit potential may not be based on direct
revenue alone, because there may also be indirect benefits to the MFSP. For example, when a mobile network
operator (MNO) offers a person-to-person money transfer service, it accrues benefits through decreased churn
and higher adoption rates. These translate into reduced costs and increased revenues through the companys
data and voice services. However, it is still a useful exercise to approximate total expected revenue even in
the overly simplified example above because this evaluation provides a directional sense to the firms
managers whether they should pursue the project over alternative priorities.
In short, the main purpose of market sizing is used to inform business viability, specifically go/no-go decisions, as
well as key marketing decisions, such as pricing of the service or marketing tactics to increase usage. It also
provides a preliminary estimate of the level of operational and technological capabilities required to service the
expected market. Depending on the total potential market, for example, the firm may need to consider
upgrading call-center staff to respond to forecasted customer service inquiries.
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Methods
There are two main market sizing methods: bottom-up and top-down. Each method has unique benefits,
although the top-down approach is more common in practice. Most firms will also find the top-down approach
to be the simpler method in terms of mobile money services.
Bottom-Up Approach
The bottom-up approach sizes a market using projections of individual clusters. A firm must first identify the
customer segments it intends to reach, and then make estimates of their size and growth.
As an example, assume a MFSP is entering a new market to provide money transfer services. Through a
combination of primary and secondary research, the company determines that there are two customer
segments that are most likely to use the service: women over 40 years old in rural areas, and younger males
between 25 and 39 years old who are high school educated and live in urban centers.
In this case, the company may be able to work with a microfinance or banking partner to craft a relatively
accurate potential size of the market using the partners customer database of socio-demographic data
(address, age, type of business) and performance behavior (repeat borrowers, low delinquency) for the two
segments. It can project growth rates and attrition based on historical data.
While relatively straightforward, this approach may not always be as accurate, especially in markets where
detailed data is not readily available, because it is often difficult to size individual segments. If, for example, a
constraint were that the two segments be literate, the firm may have difficulty obtaining a reliable estimate.
Top-Down Approach
The top-down approach, also called the chain ratio method, involves defining a universe target market and
applying various filters that continually reduces the figure to an estimation of the net market. Put another
way, unlike to the bottom-up approach, the firm starts with an estimate of the overall market and then
evaluates the (limited) successive proportions that it intends to reach.
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For example, suppose a government plans to distribute social payments to rural farmers through mobile phones
and wants to use the top-down approach to size the market. It first defines the universe as any adult in a rural
area, and finds from its own government statistics that there are 20 million adults. Out of these, 20% are
farmers. The transfer solution will only work for people who have mobile phones. Based on estimates provided
by sales representatives of the MNOs, it is determined that this equates to 70% of rural adult farmers. Finally,
based on phone interviews with rural farmers from a representative area, the MFSP further estimates that
about 40% qualify for the government transfer program, which is based on crop revenues.
The market potential is simply the overall universe multiplied by these individual proportions, or:
20,000,000 adults * 20% farmers * 70% (mobile) * 40% (qualify) = 1,120,000 market potential
Naturally, it makes no difference in what order the proportions are calculated, as they will all be multiplied in
the end. The decision is usually based on which data is more readily available. It may be easier, for example, to
obtain the proportion of farmers who are rural adults than that of mobile phones in rural areas.
A more detailed scenario with comments is presented in the Case Example at the end of this section.
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Data Sources
Firms can draw on a number of sources to obtain data for market sizing. Four of the most common are:
Statistics: Data that is typically available publicly. This includes information from government statistics
departments, central banks, and trade associations. For example, to size an unbanked market, a government
might track the countrys population as well as the number of people served by all formal and regulated
financial institutions. Central banks usually publish average retail interest rates, number of savings accounts,
international transfer volumes, and other useful information. Annual reports of local MNOs typically provides
valuable data in terms of mobile phone penetration rate and customer projections.
Data Mining: Seeking information from the MFSP and its partners customer bases is an often overlooked, but
valuable, exercise to arrive at market size, especially since mobile money services often targets an existing based
of mobile phone users and individuals with bank accounts. Due to Know-Your-Customer regulations, most, if not
all, regulated financial institutions capture a wealth of data on consumers, including age, region, gender,
education level, income level, and type of business. Those that offer loans capture additional information, such
as disposable income, home ownership, and sources of income, necessary to make underwriting decisions.
Combined with customers performance data, a bank may even be able to estimate, the cash-in/cash-out needs
for specific consumer segments over time.
Competitive Intelligence: Can be used to make market sizing or profit estimates more accurate. If a MNO
publicly claims that mobile money has reduced churn by a certain percentage, or if its advertising outlines is
pricing scheme, a MFSP can use set these values as initial estimates in its calculations. Competitive intelligence
can be obtained through public sources, such as websites, annual reports, and conference presentations, or,
increasingly, through third-party research firms that compile information. For example, FSD Kenyas analysis of
M-Pesa is available for free download. Other research firms, such as Juniper Research, provide an analysis of
mobile money businesses for a fee.
Market Research: Primary research that engages existing or prospective customers directly, should be used
after the MFSP has performed some of the other data gathering techniques just described. Although such
research is usually used in the product development phase to design a service that meets the needs of
customers, it can also be used to refine market sizing projections. A MFSP may reduce its estimates if some
market segments have unfavorable views of the proposed service in focus group interviews, or, as the case
below demonstrates, to gauge money transfer frequency.
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Challenges
Market sizing, particularly for mobile money where data is sparse, is an important but ultimately challenging
exercise to conduct. MFSPs should be aware of three key realities in estimating market potential.
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Key Lessons
1. Make sure to ask the right question to size the market as accurately as possible
It appears simplistic, but the key to getting market sizing right is to ensure that the calculations are done
with the right questions in mind. It is not enough for a bank to expect 10% of its customers will use mobile
money or for MNO to expect to capture 20% of the high-income market.
The interested MFSP must first ask what service it plans to offer for each service is very different and will
engender a different uptake pattern. If the MFSP is planning to introduce several services, it would be
prudent to calculate the market sizes for each service separately, and ideally over several years.
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optimistic profits allows senior management to make informed decisions based on worst-case and best-case
scenarios. Data points, which have lower confidence intervals, should be noted. Over time, some of the
points, such as price points or operational costs, should be refined with more accurate information,
improving the accuracy of the final projected ranges.
WorstCase
Migrant Population in 800,000
Capital City from 2
Northern States
% of A who have mobile 55%
phone with partner
MNO
% of B who send money 85%
per month
% of C who are 60%
unbanked
Best-Case
Source
1,100,000
Government
Difficult to assess migrant
Statistics; Academic population #; range is wide.
Reports
Partner MNO
Partner MNO estimate
based on KYC forms
C
D
60%
90%
Central Bank
80%
National Association
of
Microfinance
Institutions
15%
Socio-Demographic
Data from Partner
MNO and National
Association
of
Microfinance
Institutions
65%
Primary Survey
Notes
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Prospective 5,049
46,332
The prospective buyers in 1st year are thus between 5,049 and 73,008. This is not only a sizeable range, but
significantly less than what the Marketing Manager had originally assumed when she thought of the potential of
800,000 to 1,100,000 migrants that could be reached.
The manager also wants to calculate the market sales potential. The primary survey she had administered
indicated the half the migrants send about 1 transfer per month, and the other half about 2 transfers per month.
She is not sure what price to set, given that she does not know the prospects sensitivity to price, and it is too
early in the business planning phase to do any detailed price elasticity analysis. But thinks that if she sets it at
about 75% of the alternative that they are using with the informal system (currently 4$ fixed per transfer), she
can capture at least half of the prospective buyers. But if she sets at $2, or half, she estimates she could capture
perhaps 70% . She continues her analysis in the table below.
G Prospective Buyers
H Quantity of Transactions
Per Year
I Price Per Transaction
J % of prospects who would
buy service
1st Year Sales Potential
Worst-Case
5,049
12
Best-Case
46,332
24
$2
70%
$3
50%
$84,823
$1,667,952
Again, she sees a wide range of expected sales potential, with the best-case estimate nearly 20 times the worstcase estimate. (This range is not as uncommon as it may appear for a new product.). Ideally she would project
these numbers over several years to have a better idea of whether to move ahead with the project or not.
Furthermore, she may decide that she needs to broader the product suite (i.e., other types of services) or
customer segments (e.g., all migrants) to increase both the overall prospective buyers and revenue. She could
consider offering different incentives to boost the number of transactions conducted per month. Furthermore,
she sees that the sales potential hinges on the market penetration of its partner MNO; if growth rates for the
industry remain modest while the partner MNOs market share starts to erode, it might greatly reduce the
available prospect pool from the proposed P2P service.
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